University of Nottingham Commercial Law Centre

International energy investments and unrecognised states: Opportunities and risks for private actors

Dr Marianthi Pappa

Petroleum industry is highly competitive. Oil and gas companies are in a constant race to discover hydrocarbons where no one else has searched before. That is particularly the case in marginal or frontier areas, including deep and ultra-deep waters (over 3,000 meters). An increasing number of exploratory and drilling operations also takes place in disputed areas, viz., land or maritime spaces which are concurrently claimed by two neighbouring countries. States involved in territorial and boundary disputes often proceed with unilateral exploration and exploitation activities in the contested area to bolster their national claims towards their neighbours.

However, the conduct of operations in areas of uncertain national jurisdictions is fraught with legal challenges for the involved private actor. Without a fixed international boundary, it is unclear which state can control the area in question and extract any natural resources located therein. This uncertainty may ultimately discourage or affect existing private investments, as these require a secure political environment and a legal title over the area of operations.

The situation becomes even more complicated when the dispute involves unrecognised state entities. The recognition of an entity as a state is pivotal in international law. Whether it be that recognition grants statehood or merely confirms a state’s legal existence, it has important implications for the concerned entity and for the entire international community. This includes private energy companies holding investment interests in areas of disputed jurisdiction. A sovereignty dispute is, in itself, a source of tension between the concerned state entities. But this tension also extends to non-state actors operating in the disputed area. A series of risks arise for private interests, not only amid the dispute between the concerned entities but also after its potential settlement. These vary from a temporary disturbance of operations to permanent termination thereof, or forcible eviction of the private investor from the concession area. Also, any potential collaboration or communication with an unrecognised state entity may affect the company’s home state, and cause further reputational risks for the private investor in the global market.

The issue is currently present in the Eastern Mediterranean region. Two well-known examples are the dispute between the Greek and Turkish communities of Cyprus, and that between Israel and Lebanon, which both involve the question of state recognition. A comparison between these cases brings to light a number of important considerations for companies operating or seeking to operate in areas with similar disputes. Not all cases are the same, and depending on the degree of recognition by the international community (significant, limited, no recognition), potential investors may decide to avoid the disputed area or accept the involved risks. The crucial question in the latter case is what legal or commercial means can protect private interests from disturbance or discharge. These would include: security or ‘’grandfather’’ clauses (in delimitation treaties between the disputants), political insurance, joint development/unitisation agreements, joint ventures with ‘’stronger’’ companies, or concurrent investments in both sides of the disputed area.

But although various legal mechanisms are available for the protection of private interests, their efficacy is uncertain. International law primarily protects the interests of states rather than non-state actors. Also, depending on the specifics of the dispute, the degree of recognition between the state entities and their participation to international treaties, the commercial value of resources, and the stage of operations, an area may be suitable or completely incompatible with the investment portfolio of a company. As a result, before expressing their interest in an area of uncertain jurisdiction, energy companies must perform a due diligence control and develop a risk mitigation strategy. Unfortunately, no risk mitigation mechanism is perfect in such complex situations. A company may eventually have to abandon an area if relations between the concerned state entities deteriorate.

November 2019

University of Nottingham Commercial Law Centre

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